How Strategic Information on Equipment Leases Can Help Businesses Under Uncertain Landscapes

by Jennifer Booth

Jennifer Booth is the VP of Accounting at LeaseQuery, a purpose-built, CPA-approved lease accounting software solution for the most comprehensive regulatory reform in 40 years. For more information, visit LeaseQuery.com



Many companies’ priorities have shifted due to the pandemic, creating cash flow concerns for some organizations. Jennifer Booth explains how companies may benefit from a detailed understanding of their lease agreements, which can provide clear visibility into their entire lease portfolio, allowing for better decision making and the potential to generate liquidity during this critical time.

The COVID-19 pandemic has impacted daily life across the globe, and the uncertainty that came with it continues to loom. Aside from the personal disruptions caused by the pandemic, in terms of health and finances, businesses have also been heavily affected. Companies’ priorities have shifted, creating cash flow concerns for some organizations trying to pay their equipment leases.

Prior to the global pandemic, a company’s main expenses were often paying staff and financing assets needed to facilitate business. However, with organizations pivoting to remote work, many are not using as much equipment or office space—most of which are typically leased—in addition to unfortunately furloughing staff.

The effects of social distancing policies have created a loss in customers for many organizations as temporarily closed restaurants and shuttered brick-and-mortar storefronts remain. There are reduced banking branches, empty airplanes, buses and trains and canceled event spaces across the nation. Yet, at the same time, some companies are seeing a boom in their business. For instance, the necessity of delivery trucks for groceries as well as transportation equipment for shipping goods are vital, thus quickly leading companies to expand leased assets. As organizations strategize too rapidly flex business operations, decisions regarding leases need to be made.

Though the Financial Accounting Standards Board (FASB) has approved pushing back the implementation deadline for ASC 842, the new standard for lease accounting, which private companies must be ready to comply with, many companies may find a benefit to the detailed understanding of their lease agreements and future lease commitments that preparing for implementation provides a company. This understanding can provide clear visibility into their entire lease portfolio, allowing for better decision making—assisting a company with decisions to generate liquidity during this critical time.

For companies discussing their next course of action for leases, here are some key points to keep in mind:

Strategic Accounting Solutions for Remote Work

Cloud-based tools such as lease accounting software allow finance organizations to continue supporting the business while in a remote environment. They also ensure the books are closed accurately and in a timely manner, which is critical during the pandemic response. Many lease accounting software solutions not only allow companies to meet compliance needs with quarterly reporting, but they also assist companies with making strategic decisions.

A lease software tool can keep decentralized organizations on track through reminders of upcoming payment dates, renewal dates or termination options. Further, these tools can be used to perform “what if” scenarios as a company monitors its liquidity needs or determines that certain of its assets are no longer necessary. The centralized repository for lease agreements and amendments allows all departments to quickly act on these decisions, even in a remote environment.

Negotiate and Account for Rent Concessions

For many companies, the pandemic has resulted in a shift in its normal operations which may leave current leased equipment unused. At the same time, many companies are facing cash flow concerns. A company with these fact patterns may find it appropriate to talk to its landlord about deferring or reducing its rental payments during the pandemic period.

These amendments to existing lease agreements can create the perfect storm for an accounting department. During a remote work environment where employees are focused to meet different business operation goals, a significant number of lease agreements may be changed that need to be accounted for during the period. These changes are typically accounted for as lease modifications, which require a reassessment of the lease liability under ASC 842. This requires not only an update of the rental payments in the company’s lease records, but also the identification of a new discount rate, which is one of the areas public companies indicated as the most complex.

 The FASB received feedback on the volume and complexity of these changes and in April 2020 offered an optional election, allowing lessees and lessors to account for these rent concessions within lease agreements as a result of the COVID-19 pandemic in net income in the current period (if certain criteria are met), rather than recognizing as a modification and impacting the prospective periods.

A good software solution is equipped to handle accounting for these rent concessions using either this optional election or as a lease modification. Given the volume of these anticipated changes, companies with a lease accounting software in place can easily address these lease amendments with a minimal impact to their organization and confidence in the accuracy of the resulting balances, allowing them to focus on running their business in this changing climate.

Evaluate Value of Right-of-Use Assets

Companies that have implemented ASC 842 now have new right-of-use (ROU) assets on their books. In conjunction with their quarterly reporting requirements, companies need to update their processes to include these assets in their impairment analyses. Companies should evaluate whether any impairment indicators (such as significant changes to business operations, reduction in market prices, etc.) have been identified during the period. If so, a company must perform an analysis of future cash flows to determine if an impairment charge is necessary to reduce the carrying value of the ROU assets to its fair value.

Why It’s Not Wise to Wait

The ability to close the books accurately in a remote environment, while also supporting the company’s strategic decision-making, is a contribution lease software will make to the business. This is something that public companies who have already transitioned to ASC 842 have found. Finding a lease accounting solution that will also handle legacy accounting treatment will allow a company who has not yet transitioned gain these liquidity and cost-saving analyses in the current period, and then have the data and analysis in place for a painless transition to the new lease accounting standard in the future.

Jennifer Booth is the VP of Accounting at LeaseQuery, a purpose-built, CPA-approved lease accounting software solution for the most comprehensive regulatory reform in 40 years. For more information, visit LeaseQuery.com

 

Leave a comment

View Latest Digital Edition

Terry Mulreany
Subscriptions: 800 708 9373 x130
terry.mulreany@monitordaily.com
Susie Angelucci
Advertising: 484.459.3016
susie.angelucci@monitordaily.com

View Latest Digital Edition

Visit our sister website for news, information, exclusive articles,
deal tables and more on the asset-based lending, factoring,
and restructuring industries.
www.abfjournal.com